I investigate how financial audit regulation in the charitable sector affects donor behavior. I propose that audit mandates alleviate moral-hazard concerns by (1) reinforcing donors’ belief that charities are monitored and (2) committing charities to obtain an audit ex post. My empirical strategy relies on variation in size-based exemption thresholds across states and differences in size driven by the nature of charities’ activities. Consistent with audit mandates reducing donors’ reliance on charity reputation, I find that donations are less concentrated on large, high-reputation charities. I show this reallocation of resources allows the charitable sector to serve more diverse geographic areas and social needs. In terms of the effect on willingness to give, I document that audit mandates are associated with a higher proportion of taxpayers who donate, especially among people with a high opportunity cost of time. However, I only observe a sizable impact on total contributions in dollars for charities that conduct activities that are particularly opaque to outside donors. Collectively, these results suggest audit regulation reduces information frictions and thereby affects resource allocation in the market for charitable giving.

We find that Sarbanes-Oxley (SOX) had two significant effects on the audit market for nonpublic entities. The first short run effect stems from inelastic labor supply coupled with an increase in audit demand from public companies. As a result, private companies reduced their use of attested financial reports in bank financing by 12%, and audit fee increases for nonprofit organizations (NPOs) more than doubled. The second long run effect was a transformation in the audit supply structure. After SOX, NPOs were less likely to match with auditors most exposed to public companies, while auditors increasingly specialized their offices based on client type. Audit market concentration for NPOs dropped by more than half within five years of SOX and remained at this level through the end of our sample in 2013, while the number of suppliers increased by 26%. Our results demonstrate how regulation directed at public firms causes economically important spillovers for nonpublic entities.

I investigate the effects of a financial statement audit on the governance practices of organizations. I find that obtaining an audit causes organizations to implement governance mechanisms such as conflict-of-interest policies, whistleblower policies, and formal approval of the CEO’s compensation. I also find that audits curtail managers’ ability to extract private benefits as evidenced by a reduction in nepotism and the CEO-to-employee pay ratio. To perform my analyses, I turn to the nonprofit setting because it offers plausibly exogenous variation in audits, and standardized disclosures about governance practices. Specifically, I rely on a regression-discontinuity design based on state-level regulatory thresholds that dictate which organizations are legally required to obtain an audit.